If your using POP or SMTP in outlook, both protocols send plain text usernames/passwords by default. Surely there is some security issue with this, sniffers can definitely see the passwords. However, you can configure outlook to use SMTP authentication and SSL encryption if the POP/SMTP servers supports it.
If your using IMAP in outlook, I think you can configure authentication and SSL the same way too.
Tell us if you need more help on the configuration.